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Sustaining Production Chains through Financial Linkages

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  • Se-Jik Kim
  • Hyun Song Shin

Abstract

The technological constraints on sustaining production chains have been discussed extensively by development economists, but the role of financial linkages has received less attention. In a model of recursive moral hazard for a manufacturing supply chain, we show that the structure of interlocking receivables and payables serve as the glue for the production chain that sustains complex manufacturing output. The inefficiency associated with recursive moral hazard can be mitigated through optimal delays in payments along the chain. However, efficiency requires large stocks of working capital, and invoice prices are high due to implicit amortization costs of inter-firm credit.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.3.402
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 102 (2012)
Issue (Month): 3 (May)
Pages: 402-06

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Handle: RePEc:aea:aecrev:v:102:y:2012:i:3:p:402-06

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  1. Holmstrom, Bengt & Tirole, Jean, 1997. "Financial Intermediation, Loanable Funds, and the Real Sector," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 663-91, August.
  2. Chee K. Ng & Janet Kiholm Smith & Richard L. Smith, 1999. "Evidence on the Determinants of Credit Terms Used in Interfirm Trade," Journal of Finance, American Finance Association, vol. 54(3), pages 1109-1129, 06.
  3. Kremer, Michael, 1993. "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 551-75, August.
  4. Antonio Ciccone, 2000. "Input chains and industrialization," Economics Working Papers 498, Department of Economics and Business, Universitat Pompeu Fabra.
  5. Charles I. Jones, 2011. "Intermediate Goods and Weak Links in the Theory of Economic Development," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 1-28, April.
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Cited by:
  1. Philipp Harms & Jaewon Jung & Oliver Lorz, 2014. "Offshoring and Sequential Production Chains: A General-Equilibrium Analysis," MAGKS Papers on Economics 201402, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

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